There are different views on finance; the procurement view, custodian function
view and decision making view. Finance means “the provision of money at the time it is
wanted”, according to F.W. ~aish’. This definition of finance function highlights the
procurement view. Finance function is a broader one. It includes the financing decision,
investment decision, and dividend decisions. Thus, “the term finance may be defined as
the management of the flow of money through an organization, whether it will be a
corporation, school, bank or governmental agency” John J. ~am~ton~ (1976). This
definition of finance emphasizes the custodian function of money. Another broader
approach to the function of finance is concerned with the financial decision-making. In
this view, finance function is related to procurement of funds as well as their effective
utilization3. In the words of Howard and Upton, “Finance may be defined as that
administrative area or set of administrative function in an organization which relate with
arrangement of cash and credit so that the organization may have the means to carryout
its objectives as satisfactorily as possible”. Thus the function of finance is financial
decision making by harmonizing individual motives and enterprising goals.
Monetary assets, Financial assets and Tangible assets
The concept ‘financial asset’ can be distinguished from monetary and tangible
— assets. The two important properties of monetary assets that distinguish them from all
other financial and non-financial assets are the exchange convenience and capital
certainty4. Monetary assets are the most marketable and the most reversible of all asset
‘ F.W.Paish, Business Finance, PP.3 given in B.L.Acharya, ‘Financial Analysis’, Mohit publications New
Delhi, 2001, pp. 182-185.
Hampton J.J., ‘Financial Decision Making – Concept, Problems and Cases’, Reston Publishing Co., Inc.
(Reston, Virginia), Ed. 1976, pp.217.
‘ Hunt Williams and Donaldson, ‘Basic Business Finance’, pp.3
‘ Basil J. Moore, ‘An Introduction to the Theory of Finance; Asset holder behaviour under uncertainty’,
Amerind Pub. Co., New Delhi, 1971 pp 158
forms, reversibility being defined as the difference between buying and selling price
(realizable value) at an instant of time. This transfer cost advantage is termed as the
exchange convenience yield of monetary assets. The capital certainty of an asset refers to
the predictability with which its expected market value at future dates is anticipated.
The dealers in financial assets are deficit-spending business units, households, and
government. It includes currency and deposits, investment in securities, loans and
advances, small savings, life fund, provident fund and trade-debt-credit. The important
characteristics of financial assets are that they are generalized claims against current
production. They are usually fixed in nominal money units, but may be tied to some
future contingency, or represent pro rata shares in the returns of enterprises. Financial
assets are held primarily as an attractive income-earning store of purchasing power.
Financial assets are supplementary, being much less dependent on the presence of other
cooperative factors in order to yield their services. Financial assets can be created or
destroyed virtually instantaneously by the act of borrowing or repayment. Lastly,
financial assets are less liquid than monetary assets.
Tangible assets are material things, which are highly speczfic in form and use. Its
yields are in kind, can be sold in order to convert into another form of wealth or income.
Tangible assets are usually held for physical services like houses, machines, and
consumer durable goods. Tangible assets are highly complementary, and characterized by
important externalities in use. It can be made to yield their services in saleable form only
with the cooperation of other productive factors. They can be increased only slowly, by
net real investment and, are less liquid than financial assets.
The role of finance function in economics is that its interrelationship with
economic development. In the words of Gurley and shaw5 “an immature financial system
is in itself an obstacle to economic progress”. A number of economists have studied the
importance of financial development for the growth of the economy in the early 19th
‘ John G Gurley & Edward S Shaw, ‘Money in a theory of Finance’, Motilal Banarsidass, Delhi, 1968
century; prominent among them were Walter Bagehot and Joseph Schumpeter. Raymond.
W. Cioldsmith6, James ~obin~, Ronald I. ~c~innon” John G. Gurley and Edward S.
shaw9, James C. Van ~orne”, and George ~osen” have stressed the role of financial
development in economic growth. The empirical evidence in India suggests that financial
development and economic growth reinforced each otherI2.
By financial development we mean the development of the financial system. The
main components of the financial system are financial institutions, instruments and
markets. The literal meaning of financial system is “a set of interrelated institutions
which collect savings and distribute them to borrowers, making possible the separation of
the ownership of wealth from the control of physical capital”I3. The financial system
performs this function by coordinating surplus spending units (SSUs) and deficit
spending units (DSUs). It transfer financial resources in the best possible way in an
h Raymond W. Goldsmith, ‘Financial lntermediaries in the American Economy since 1900’, Princeton, N.J,
, ‘Financial Structure and Development’, Yale, 1969.
, ‘The Financial Development of Mexico’, Paris, 1966.
, ‘The Financial Development of India, 1860-1 977’, Oxford University Press, NewDelhi,
James Tobin, ‘A General Equalibrium Approach to Monetary Theory’, in his Essays in Economics;
Macroeconomics, Vol. l, Chicago 1971, pp. 322-28.
, and W.C. Brainard, ‘Asset Market and the Cost of Capital’, given in Bela Balassa and
Richard Nelson (ed), ‘Economic Progress, Private Values and Public Policy’, Essays in honour of William
Fellner, Amsterdam, 1977, pp. 235-62.
, ‘The Monetary Interpretation of History’, American Economic Review, June 1965, No.55.
MC Kinnon, R.I., ‘Money and Capital in Economic Development’, The Brookings Institution, Washington
, ‘Money and Finance in Economic Growth and Development’, (ed), Marcel Dekker, Inc.,
New York, 1976.
Gurley, J.G. and E.S. Shaw, ‘Financial Structure and Economic Development’, Economic Development
and Cultural Change, Vol. 15, No.3, 1967
Shaw, E.S., ‘Financial Deepening in Economic Development’, Oxford University Press, New York, 1973
John, G. Gurley, ‘Financial Aspects of Economic Development’, American Economic Review, Sept. 1955,
John, G. Gurley, ‘Financial lntermediaries and the Savings Investment Process’, The Journal of Finance,
May 1956, No.9. 10 James C. Van Home, ‘Financial Market Rates and Flows’, Prentice Hall, Inc, New Jersey, 1978.
‘l George Rosen, ‘Factors in the Development of Capital Market’, given in L.C. Gupta, (ed), ‘Readings in
Industrial Finance’, The MC Millan Co. of India Ltd., 1976.
l’ Report on Currency and Finance 1999-2000, Reserve Bank of India, pp. 11-2
l’ Drake, P.J, (1 980), ‘Money Finance and Development’, Oxford Robertson, given in dictionary of
Economics, Donald Rutherford, Routledge, London
economy where the savers and investors are not the same. This ‘Layering effect’14 is
considered as an index of financial intermediation. The more efficient the transfer is, the
larger the flow, allocation of resources and economic development”.
Indian Financial System
The financial system is a set of institutional arrangements through which financial
surpluses in the real economy are mobilized from surplus units and transferred to deficit
spenders. The institutional arrangements include all conditions and mechanisms
governing the production, distribution, exchange and holding of financial assets or
instruments of all kinds and the organization as well as the manner of operation of
financial markets and institutions of all descriptions. Specifically, financial institutions,
financial assets, financial markets and financial services are the main constituents of any
Financial Intermediaries in India
In India, financial intermediaries are classified in different ways. One
classification is banking institutions and non-banking institutions, the other classification
is capital market intermediaries and money market intermediaries. In the former
classification, the banking institutions differ from non-banking institutions in its payment
mechanism. The distinction between the two is that the former is the “creator” of credit
but the latter is the “purveyors” of credit. In the latter classification, capital market
intermediaries deal in long term lending whereas money market institutions supply short
term funds. In India about 87% of gross domestic savings originated from the household
sector in 2003-0416. Of which 53 % is invested in physical assets. Households are
generally surplus spenders and corporate sector and government are deficit spenders.
Financial assets are the vehicles through which the savings of surplus spenders are